Cheat Sheet

Stock Options For Dummies

From Stock Options For Dummies by Alan R. Simon

If stock options are part of your compensation package — or could be at a new job — you, as an investor, should ask some questions about the company’s option plan so you know what’s what going in. And because the value of your options are linked to how well (or badly) a company is managed, you can benefit by knowing the signs that your stock values may be going up or sliding down. The Internet offers a Web site or two that can help you increase your knowledge about stock options in general and your company’s prospects in particular.

Questions to Ask before Accepting a Job Offer with Stock Options

Your potential new job includes stock options as part of your compensation package. Before you assume that having a financial interest in your new company is automatically a good thing, ask your new employer these questions:

  • One big catch-all question: How many shares? What is the strike price? And what is the vesting schedule?

  • What kind of stock options — incentive, nonqualified, or a combination of both?

  • Can I please see a copy of the stock option agreement that I’ll be asked to sign?

  • Can I also please see a copy of the company’s stock option plan document?

  • Have there been any changes in your company’s stock option plan in the past 12 to 18 months?

  • (If you’re considering a company before their initial public offering, or IPO) What is the currently planned date or time frame for an IPO?

  • What percentage of the company’s total ownership do the shares on my stock option represent?

  • When can I next anticipate receiving another stock option grant, and under what circumstances (An annual grant? When I’m promoted? As a bonus? Merit-based?)

  • (If you’re considering a company that is already publicly traded) What has been the stability of employees who have big stock option gains — have most stayed or moved on?

  • Are there any tax implications right now for my stock option grant?

Signs the Value of Your Stock Options Could Be in Trouble

You might not think about your stock options and their value very often, but the indicators in the following list are worth paying attention to. If the company is ill-run, the value of your stock options may trend downward. Heed these signs of declining stock option value and act accordingly:

  • A revolving-door management team

  • A disinterested friends-and-investors-dominated Board of Directors

  • A big jump in turnover rates

  • Rose-colored glasses syndrome

  • High levels of customer dissatisfaction

  • Poor internal systems and infrastructure

  • Inconsistent communication from management

  • Open talk among employees about leaving

  • A general sense of panic

Signs the Value of Your Stock Options Could Grow

The value of your stock options can fluctuate, and often the value is directly linked to how well the company is run. The qualities in the following list are signs that your stock options may be growing in value:

  • A steadily growing company

  • A highly qualified and motivated management team

  • An active and interested Board of Directors

  • Low employee turnover rates

  • Market-leading products or services

  • Returning, happy customers

  • Solid, functional infrastructure

  • Empowered employees

  • Thorough training programs for new employees

Stock Options Web Sites

If part of your compensation package includes stock options, check out the links to the Web sites in the following list. These Web sites offer investing information on employee stock ownership plans and lots of links to other information on stock options.

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